May Tax Evasion Be Charged as a Money Laundering Offense? The Times Are A-Changing

Tax evasion has never been a predicate offense for a money laundering charge in the United States. The government, however, has employed mail and wire fraud offenses to charge money laundering arising out of a tax crime. This article reviews the basics of U.S. money laundering laws, the use of mail and wire fraud crimes to transform tax offenses into money laundering, and recent developments worthy of discussion.¹

The basic U.S. money laundering laws are contained in Title 18 of the U.S. Code: section 1956 (laundering of monetary instruments, referred to herein as the primary money laundering statute) and section 1957 (engaging in monetary transactions in property derived from specified unlawful activity). The primary money laundering statute involves one who engages in a financial transaction knowing that the property represents the proceeds of some form of unlawful activity, which, in turn, involves the proceeds of a specified unlawful activity (SUA) with certain types of knowledge or intent.² There is a tax intent money laundering provision contained within the primary money laundering statute, but the defendant must engage in a transaction with SUA proceeds (taxes are not an SUA), and then engage in conduct that violates one of the two primary U.S. criminal tax provisions.³ Historically, the government would encounter a defendant who engaged in a different type of illegal activity (e.g., securities fraud, which is an SUA) and then later transferred the proceeds from that activity in a way that evaded taxes with those proceeds. In those circumstances, a tax intent money laundering offense could be charged.⁴

There are two other provisions of the primary money laundering statute where money is represented to be from illegal activity: one involving what is known as international money laundering⁵ and a “sting provision.”⁶ Noteworthy, the international money laundering provision does not require the use of proceeds from a prior offense but only the transfer of funds with an intent to promote an SUA. A violation of the money laundering statute is a twenty-year felony and permits forfeiture of property involved in or representing the proceeds of the offense.⁷

For purposes of this discussion, the statute references SUAs that are defined by way of a combination of predicate offenses listed in the money laundering statute itself and offenses listed in the Racketeering Influenced and Corrupt Organizations Act (RICO).⁸ Despite there being well over two hundred and fifty SUAs,⁹ what is notable is what is absent: any violation of the Internal Revenue laws dealing with tax offenses. Although a tax offense is not a direct predicate for money laundering, both mail fraud and wire fraud are listed as SUAs.¹⁰ Because the use of the mails or the use of the wires is likely to occur in connection with the filing of a tax return, tax evasion could, in theory, create a mail or wire fraud violation that is itself a predicate for a violation of the money laundering laws.

There are two federal appellate cases, one in the Eleventh Circuit and one from the Third Circuit, that arrived at different results on this issue. The Eleventh Circuit Maali/Khanani case arose out of the employment of undocumented aliens at retail stores in Florida.¹¹ The government charged the defendants with participating in a conspiracy to violate the money laundering laws based on a theory that the defendants engaged in mail and wire fraud, and the harboring of illegal aliens, all of which were SUAs. The government contended that the tax savings of paying illegal aliens “off the books” constituted the proceeds of the offense and that the use of the proceeds served to conceal and promote the illegal employment scheme.

The district court in Maali defined “proceeds” as “the amount of money received from a sale” or “the sum, amount, or value of property sold or converted into money or into other property”—i.e., as “something which is obtained in exchange for the sale of something else as in, most typically, when one sells a good in exchange for money.” The court thus rejected the government’s cost-savings theory, holding that the term “proceeds” did not contemplate profits or revenue indirectly derived from the use of labor or from the failure to remit taxes.¹²

The Eleventh Circuit affirmed the dismissal, quoting the district court opinion to hold that one could not equate retail sales revenue with “proceeds” under the theory that the revenues were illegally obtained by using illegal workers and filing false employment tax returns as follows:

[I]t is clear that the term [proceeds] does not contemplate profits or revenue indirectly derived from labor or the failure to remit taxes. While it is natural and clearly correct to say that Defendants received “proceeds” from the sale of jeans, it is, by contrast both causally tenuous and decidedly unnatural to say that the moneys one has received from the sale of a good are not the “proceeds” from the sale of a  good, but “proceeds” of the labor used to produce the good.¹³

The Third Circuit reached a different conclusion in the Yusuf case.¹⁴ The principals of a Virgin Islands supermarket chain were charged with mail fraud as the predicate activity to support international money laundering charges. The trial court followed Maali/Khanani in holding that there were no proceeds. The circuit court disagreed, relying in significant part on its prior Morelli decision in which it held that the money wired in a daisy chain excise tax fraud scheme constituted proceeds for wire fraud purposes based upon the ongoing nature of the entire scheme.¹⁵ Drawing on the Supreme Court decision in Santos, its own decision in Morelli, and two other precedents, the Yusuf court held that unpaid taxes, “which are unlawfully disguised and retained by means of the filing of false tax returns through the U.S. mail, constitute ‘proceeds’ of mail fraud for purposes of supporting a charge of federal money laundering.”¹⁶ The court, therefore, reversed the district court’s dismissal of the money laundering charges.

It is but a small step from permitting a charge based upon territorial taxes to permitting a charge based on domestic income taxes, with the mail fraud or wire fraud statute as a basis to support a money laundering offense. Nonetheless, there was very little development in this area for a number of years.

In 2004, however, the Justice Department Tax Division became concerned about the use of tax offenses as a predicate for money laundering, resulting in a series of directives, beginning with Directive No. 128.¹⁷ This Directive noted that Tax Division approval was required prior to prosecution if the conduct arose under the Internal Revenue laws, regardless of the statute used. While not providing any binding rights to a defendant, it provided guidance on charging mail fraud, wire fraud, or bank fraud, alone or as a predicate for a RICO or money laundering charge. The Tax Division would approve mail fraud, wire fraud, or bank fraud charges if there was a “large loss or substantial pattern of conduct and there is significant benefit to bringing charges instead of or in addition to Title 26 violations” or “ if there is a significant benefit at the charging stage ... at trial ... or at sentencing.”¹⁸ An example noted that a mail fraud or wire fraud charge could be appropriate if there are multiple fraudulent returns or if the target promoted a fraudulent tax shelter. The Directive specifically stated that these types of charges cannot be used “to convert routine tax prosecutions into RICO or money laundering cases” and that approval of the Tax Division and, if necessary, the Criminal Division’s Asset Forfeiture and Money Laundering Section would be required.¹⁹

This policy was further highlighted by Directive No. 145, effective January 30, 2014, which restated the Tax Division’s supervisory authority over criminal proceedings arising under the Internal Revenue laws and all related civil forfeiture actions.²⁰ Although reaffirming that the Tax Division policy does not provide substantive rights, the Directive contains an explicit statement in a footnote limiting the use of these provisions for routine tax cases:

The forfeiture laws should not be used to seize and forfeit personal property such as wages, salaries and compensation for services rendered that is lawfully earned and whose only relationship to criminal conduct is the unpaid tax due and owing on the income. Title 18 fraud statutes such as wire fraud and mail fraud cannot be used to convert a traditional Title 26 legal-source income case into a fraud case even if the IRS is deemed to be a victim of the tax fraud.²¹

The Justice Department’s Manual contains a similar provision.²²

As noted, there had been few cases that considered the use of mail or wire fraud to charge tax violations in a criminal case. At the end of 2019, however, the government brought an indictment where the lead defendant, Ramses Owens, worked at the Mossack Fonseca law firm that created foundations and trusts at the center of the so-called Panama Papers.²³ The indictment alleged that Ramses Owens assisted clients, including U.S. taxpayers, in setting up sham foundations and bank accounts in countries with strict secrecy laws and assisted in the repatriation of funds to keep undeclared bank accounts concealed. The indictment and a superseding indictment charged the principals not only with a conspiracy to commit tax evasion, but also wire fraud that permitted one of the named defendants to conceal his assets and income generated by assets and investments from the IRS. The superseding indictment then charged a money laundering conspiracy alleging, in part, that a U.S. accountant, along with the taxpayer, attempted to transport and transfer monetary instruments out of the U.S. to or through a place in the U.S. and to a place in the U.S. through a place outside of the U.S. with intent to promote the carrying on of specified unlawful activity alleged as the wire fraud in Count 3 of the superseding indictment.²⁴ An additional superseding indictment was eventually brought against the accountant that also contained wire fraud and money laundering conspiracy charges.²⁵

On February 18, 2020, the taxpayer/defendant pleaded guilty to conspiracy to commit tax evasion, wire fraud and the international money laundering charge as well as a charge involving the failure to file foreign bank account reports (FBARs). On February 28, 2020, the accountant pleaded guilty to the tax conspiracy, wire fraud, the money laundering conspiracy, a failure to file FBARs, as well as aggravated identity theft.

Many find the indictment and pleas here troublesome, especially with respect to the U.S. taxpayer. For the taxpayer, this is simply another foreign tax evasion scheme to hide income using offshore accounts and entities. It is worth noting that the Maali/Khanani line of authority that no proceeds are created by way of a tax offense does not specifically help the defendant. The government decided to charge a conspiracy to violate the promotion prong of the international money laundering laws rather than the domestic portion of the statute. The promotion portion of the international money laundering statute, as noted, does not require “proceeds” but simply the transportation of funds with intent to promote an SUA.

It is of concern, nonetheless, that the government has begun charging money laundering for what is nothing more than a traditional tax offense accomplished in part via wire fraud. The government certainly has sufficient statutory tools under the Internal Revenue Code for charging a conspiracy to defraud and failing to file FBARs that do not require the use of the U.S. wire fraud statute. The money laundering charges, as noted, permit the forfeiture of all property involved in or traceable to the offense²⁶ and the advisory sentencing guidelines are more severe for money laundering than for tax offenses.²⁷

When taxes are charged as money laundering, the government can obtain an order of restitution at sentencing for the amount of taxes due, plus an order of forfeiture for the amount of the funds involved in the offense.²⁸ The IRS then has the option of seeking civil penalties for fraud of seventy-five percent of the taxes due plus interest.²⁹ The combination of a criminal order of restitution for the tax loss with a forfeiture order, along with the possibility of a criminal fine coupled with a possible follow-on civil tax fraud proceeding, vastly increases the ultimate exposure for the offense. If Congress intended to have taxes serve as a predicate for money laundering, it could have stated so clearly in the statute but did not. It remains to be seen whether this Panama Papers case is a one-off, or whether this theory of prosecution will be used more often in the future. ■

1. Ian Comisky is co-author of Tax Fraud and Evasion (WGL 2020 Supp.) and an adjunct professor teaching money laundering at the University of Pennsylvania Carey Law School. This article reflects his views and is not attributable to his firm.
   
2. 18 U.S.C. § 1956(a)(1).
3. 26 U.S.C. §§ 7201, 7206.
4. See, e.g., United States v. Zanghi, 189 F.3d 71 (1st Cir. 1999) (money purported to be “loan repayments” were not reported on a tax return).
5. 18 U.S.C. § 1956(a)(2).
6. 18 U.S.C. § 1956(a)(3).
7. 18 U.S.C. § 982.
8. 18 U.S.C. § 1956(c)(7); 18 U.S.C. § 1961(1).
9. See United States v. Santos, 553 U.S. 507, 516 (2008).
10. See RICO, 18 U.S.C. § 1961(1) (listing 18 U.S.C. §§ 1341, 1343 in defining “racketeering activity”).
11. United States v. Maali, 358 F.Supp. 2d 1154 (M.D. Fla. 2005), aff’d sub nom United States v. Khanani, 502 F.3d 1281 (11th Cir. 2007).
12. United States v. Maali, 358 F.Supp. 2d at 1158-61.
13. United States v. Khanani, 502 F.3d 1281, 1296 (11th Cir. 2007), aff’g United States v. Maali, 358 F.Supp. 2d 1154 (M.D. Fla. 2005).
14. United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008).
15. United States v. Morelli, 169 F.3d 798, 806- 807 (3d Cir. 1999).
16. United States v. Yusuf, 536 F.3d, at 189.
17. Tax Division Directive No. 128 (Oct. 2004) (superseding Directive No. 99).
18. Id.
19. Id.
20. Tax Division Directive No. 145.
21. Id. at 3, n.4.
22. Justice Manual Title 6-4.210.
23. United States v. Ramses Owens, 1:18-cr-00693-rmb (S.D.N.Y.)
24. United States v. Richard Gaffey, 1:18-cr-00693-rmb (superseding indictment) (December 5, 2019).
25. United States v. Richard Gaffey, 1:18-cr-00693-rmb (second superseding indictment) (February 11, 2020).
26. 18 U.S.C. § 982.
27. Compare U.S. Sentencing Guidelines Chapter 2, Part T, Section 1.1 (advisory tax evasion guideline) with U.S. Sentencing Guidelines Chapter 2, Part S, Section 1.1 (advisory money laundering guideline).
28. For a recent decision considering the scope of the “involved in” provision, see United States v. Waked Hatum, __F.3d__, 2020 WL 4590542 (11th Cir. Aug. 11, 2020).
29. 26 U.S.C. § 6663. With respect to the FBAR violation, the government may seek a willfulness penalty that can be one-half of the balance of the accounts involved for each year involved. See 31 U.S.C. § 5321 (a)(5(C).

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